Fuel surcharges can be imposed with little litigation. Changing rates on the other hand can be a arduous process.
Never too old to have a happy childhood!
No, but the temporary nature of the surcharge is questionable.. most carriers have been applying a fuel surcharge component to the rate for 15 years now. I know I have. But to your other point, there should indeed be some reasoning and transparency to the amount being charged. I provide my customers with a simple formula and a link to the US DOE website showing current fuel prices. My own price is benchmarked to $.45/Liter..fuel hasn't been at that level for a very long time, so I should probably raise that, but the bottom line is that I (and hopefully most other carriers) offer some transparency in terms of how the fuel surcharge is figured, so that shippers don't get blindsided by widely flucutuating rates that have no basis in reality. Fuel charges often vary widely from carrier to carrier because the benchmark rate (the price of fuel where the fuel surcharge would be zero) varies from one carrier to the next i.e. if I decide to set my benchmark to $1.10/L then my fuel surcharge component would shrink as $1.10 more closely approximates the current price of fuel at the pump.
I agree that every business needs to make a profit and that the cost of fuel needs to be figured into the costs as well, and subject to a mark-up. What I'm saying is, that the fuel surcharge was presented as a temporary charge to help compensate for unforseeable expenses. I'm feel, once the fuel prices leveled off, instead of saying a load cost $1800 plus $175 fuel surcharge, they should have adjusted their pricing to read $1975 with fuel issues taken care of. Over the winter, we purchased lots of trucks of shingles from several vendors coming from the same factory to us, 265 miles. The price on the shingels varied some by supplyer, which is understandable. But they all had different fuel surcharge rates, that seemed flexible, if they felt they had to lower pricing to be competitive. Kicker is, all the shingles shipped on the same 3rd party trucking line, so it seems the vendors were using the fuel surcharge as a marketing/pricing tool. Would you really do that, if it was a temporary charge to help compensate for unforseeable expenses?
Thanks to Chris / CopCarSS for my avatar.
In order for a business to remain viable prices charged to its customers must cover cost and allow for a margin of profit. All cost must be marketed up, including fuel/fuel surcharges to avoid eroding the profit margin. Even a small change in profit margins can have serious adverse affects on a business, such as the ability to borrow... if my own profit margin were to drop by 2% my lendors would be concerned, and if I had shareholders they'd be concerned. And none of them would care that it was because I was simply not marking up the fuel price increase. In today's enviroment a little 2% drop in marign could make the difference between profit and loss. Some here seem to think a business should simply charge customers what its cost are.. at best that would lead to break even for a few minutes.. followed quickly by the failure of the business.
Fuel surcharges are always pitched tp the party paying them as being a way for the shipper to *recoup* the unforseen higher expense of high fuel costs. Once that unforseen higher expense leveled off, it should have been eliminated. At that point, the known costs should have been used to set competitive pricing. Otherwise, the shipper would find itself having to justify keeping the surcharge on longer than would seem neccesary. When diesel went from $3 to $4, the shippers wanted a surcharge per truck shipment based on mileage. If the price had dropped just as suddenly from $3 to $2, the shippers would have lowered their rates to be more competitive. They would not have imposed a blanket un-surcharge (rebate) per truckload.
I think Ulrich's argument is less than convincing, but that he should be nominated as the Canadian spokesman for the AAR.
The rails "sell" or justify fuel surcharges to shippers, the feds and the public in general as a means for them to pass on a highly variable component of their costs that is out of their control. That is true, although it ignores their opportunity to offset fuel cost increases through longer term fuel contracts and/or hedging via the futures market.
If it were a total wash I would accept the idea. However when margin is included, the surcharge becomes a vehicle to generate additional profit. In his example the $133 profit is presented as a loss when the fuel surcharge declines. However, it is beyond me why the carrier was ever entitled to additional $133 profit on the surcharge to begin with.
Of course at the end of the day the surcharge can be anything the parties to the contract agree to. It is the justification or presentation here that I find questionable.
Ulrich Fuel surcharges, when properly applied, not only defray fuel price increases.. they also protect profit margins. If fuel surcharges covered only the increase in fuel, overall profit margins would deteriorate. For example. Lets say a shipment is rated at $4000.00 to the customer and the total cost to move it is $3000.00. The carrier realizes a profit of $1000.00, or 25%. Now lets say that fuel goes up by $400.00 and the carrier applies a fuel surcharge that covers that increase and nothing more. Now the new rate to the customer is $4400.00 and the cost to move the order is $3400.00... again the total profit is $1000.00; however the gross margin is now only 22.74%, a drop of 2.26%! The carrier therefore should have increased the fuel surcharge beyond the cost of the fuel increase.. in this case the fuel surcharge should have been $533 dollars, not $400.00. Thus, charging the customer $4533.00. Less the cost ($3400.00) yields a $1133.00 profit which is now once again 25%. That loss of $133.00 profit (example above) is why some carriers aren't happy about the decline in fuel prices. Multiply that by a few thousand shipments, and it really adds up. Of course, those carriers who weren't smart enough to ensure that the fuel surcharge includes a profit component to protect margins have seen their margins decline with every fuel price increase and are likely out of business now.
Fuel surcharges, when properly applied, not only defray fuel price increases.. they also protect profit margins. If fuel surcharges covered only the increase in fuel, overall profit margins would deteriorate. For example. Lets say a shipment is rated at $4000.00 to the customer and the total cost to move it is $3000.00. The carrier realizes a profit of $1000.00, or 25%. Now lets say that fuel goes up by $400.00 and the carrier applies a fuel surcharge that covers that increase and nothing more. Now the new rate to the customer is $4400.00 and the cost to move the order is $3400.00... again the total profit is $1000.00; however the gross margin is now only 22.74%, a drop of 2.26%! The carrier therefore should have increased the fuel surcharge beyond the cost of the fuel increase.. in this case the fuel surcharge should have been $533 dollars, not $400.00. Thus, charging the customer $4533.00. Less the cost ($3400.00) yields a $1133.00 profit which is now once again 25%.
That loss of $133.00 profit (example above) is why some carriers aren't happy about the decline in fuel prices. Multiply that by a few thousand shipments, and it really adds up. Of course, those carriers who weren't smart enough to ensure that the fuel surcharge includes a profit component to protect margins have seen their margins decline with every fuel price increase and are likely out of business now.
Fuel surcharge should include margin....
Fair enough. Should be a total wash, then.
-Don (Random stuff, mostly about trains - what else? http://blerfblog.blogspot.com/)
oltmannd What I don't get is all the wringing of hands over the loss of the fuel surcharge when on the other side of the books, it's balanced by a nearly equivalent cost reduction. If it's due to lag...and worry really is warranted, then it really was a "back door" rate increase - which the shippers whined about. If it really is just straight-up cost adjustment, then it all washes out at the end and should only be an footnote, hardly worthy of the attention it's getting. Can't have it both ways....
If it's due to lag...and worry really is warranted, then it really was a "back door" rate increase - which the shippers whined about.
If it really is just straight-up cost adjustment, then it all washes out at the end and should only be an footnote, hardly worthy of the attention it's getting.
Can't have it both ways....
One further wrinkle: The supposedly equal amount of decrease in revenue and costs may 'skew' certain financial ratios in an undersirable direction. I don't readily see how that could happen - equal amounts off the gross revenue and expense items would leave the net unchanged, which would then be a higher percentage of the gross revenue - but I suppose some other calculations could be affected by that. (Compare the effect on Gross Ton-Miles per Train-Hour that running shorter and faster trains can cause: GTM/TH does drop, but average speed increases, car dwell time and car hire costs decrease, etc.)
- Paul North.
It only takes one fall down the basement stairs with a bag of salt over your shoulder to fully apprecate the convenience of home delivery.
cacole MP173 Also am charged by the water softener company for delivery of salt. I installed a Morton water softener and buy my own salt pellets, which several local stores have in stock, instead of paying someone to deliver salt or change a softener tank.
MP173 Also am charged by the water softener company for delivery of salt.
Also am charged by the water softener company for delivery of salt.
I installed a Morton water softener and buy my own salt pellets, which several local stores have in stock, instead of paying someone to deliver salt or change a softener tank.
Some people find that horsing around 40 to 80 pound bags of salt is more physical labor than they want to perform or have the ability to perform.
I am billed a fuel surcharge for our garbage pickup by one of the large environmental companies...this is for our home pickup
Ed
The fuel surcharge is very much alive and well in the trucking industry. The railroads no longer charge it?
Whilst in high school in MI, I worked part time in a "party store" (a liquor & beer store that had a few other items in the inventory).
Beer prices were set by the market. Liquor prices were set by the state. Thus a bottle of "Old Rotgut" cost the same anywhere in the state. Liquor stores bought their supply from a state-run warehouse.
When the state revised liquor prices periodically, the stores bought accordingly.
If the price of "Old Rotgut" was slated to rise, the stores stocked up before the date of the price increase (assuming it was a popular seller), as they could keep the difference in price.
Similarly, if the price of "Pirate's Rum" was slated to drop, they let their stock drop, as there was no sense paying the extra when you wouldn't be able to recoup the price (or as much of it).
I'm sure a similar "game" goes on with the railroads and fuel, and the surcharges therefor.
Larry Resident Microferroequinologist (at least at my house) Everyone goes home; Safety begins with you My Opinion. Standard Disclaimers Apply. No Expiration Date Come ride the rails with me! There's one thing about humility - the moment you think you've got it, you've lost it...
Don,
You are pretty accurate. It shouldnt be a big deal. It is simply a recovery method of volitility of fuel prices...or is it more? Back in my LTL days in the 1980s the fuel surcharges came into play and it didnt take long to figure out these were used as a recovery plus revenue and profit enhancement.
Today, public companies are all about growth. Thus a drop in "revenue" due to fuel surcharge is a negetive.
My concern is how does one truly determine what the surcharge should be? Is your shipment (car) part of one hundred car train or a 10 car train? There are certain efficiencies with operations and loads carried.
It shouldnt be a big deal, but when NS is reporting several leaks in the boat, then it is one of several issues.
Our bookkeeper's name is Greg. He see in two colors-black & white. When we run up against issues like this that involve weirded out financial things and such that don't make a lick of sense, we just shrug and say "It's a Greg thing". It doesn't make it any clearer, but it makes our heads hurt less. As far as the lag is concerned, that's just human nature. When costs are going up, you want to be able to recoup that additional cost as quick as you can. When costs are going down, you want to hang onto that higher price until the market forces you to let it go.
What I don't get is all the wringing of hands over the loss of the fuel surcharge when on the other side of the books, it's balanced by a nearly equivalent cost reduction.
The trucking industry is still pretty good about quoting a rate, plus a fixed fuel charge.
Looking at the 1st Qtr slides, the surcharge was down $132M vs 2014, but the fuel cost was down $168M, so that should be a net "win".
I don't get it.
One of the railroads -- I think the UP -- in their analysis of first quarter results commented that there was a lag in adjusting the fuel surcharge which led to a positive effect on earnings for the quarter.
...have largely gone away as the price of oil has stayed low. However, RRs are using the loss of fuel charge revenue as a reason for poorer results (at least NS is...)
So, a while back, customers were claiming that the surcharges were just "disguised" rate hikes and were in excess of the increase in fuel cost.
If they were exactly to cover the increase in fuel, then shouldn't the revenue loss equal a drop in cost? No RR were claiming fuel surcharge revenue as a reason for lower ORs over the past few years.
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